The Euro becomes stronger as the president of the ECB plays down anticipations of continued rate reductions

March 10, 2016 – Financial Times

The European Central Bank has unleashed a bigger than expected package of measures to stimulate the eurozone economy, with expanded quantitative easing, incentives to banks to increase lending and further interest rate cuts.

The ECB cut its deposit rate on Thursday by 10 basis points to minus 0.4 per cent but eased the impact on banks with cheaper short-term loans and longer-term liquidity at negative interest rates — essentially, paying eurozone lenders to increase credit to households and companies.

Mario Draghi, the ECB president, said interest rates would stay low for “an extended period” and he kept open the option of a further cut. But he added his voice to growing unease about negative rates among top central bankers, saying he did not anticipate pushing deeper into negative territory, partly because of the impact on banks.

“Does it mean we can go as low as we want without having any consequences on the banking system? The answer is no,” the ECB president said.

His comments on rates triggered a surge in the euro to $1.12, a near 2 per cent rise on the day, after it earlier plunged on the news of the ECB’s measures.

Analysts interpreted the measures as a recalibration of the ECB’s armoury, putting more ammunition into reinforcing the eurozone’s economy and less into weakening the currency.

The ECB raised the amount of bonds the eurozone’s central bankers buy each month under QE from €60bn to €80bn — a greater sum than many analysts had expected. It also expanded the range of assets it will buy to include high-quality corporate bonds.

To help banks, it will provide liquidity through so-called targeted longer-term refinancing operations, with rates as low as minus 0.4 per cent — in effect paying them to borrow money.

The idea was tabled at a meeting of the ECB’s governing council only on Thursday morning and is viewed as a radical signal of the central bank’s intent to have as much impact on growth and inflation as it has had on financial markets.

“A central bank lending at minus 0.4 per cent is a pretty big deal whichever way you cut it,” said Richard Barwell, an economist at BNP Paribas Investment Partners.